Summary: With the Communiqué (Serial No:
18) on the Amendment of the Corporate Tax General Communiqué (Serial No: 1)
published on the Official Gazette dated May 25, 2021; explanations have been
made regarding the implementation of financial expense restriction rules.
Explanations: The Communiqué
(Serial No: 18) on the Amendment of the Corporate Tax General Communiqué
(Serial No: 1) was published on the Official Gazette dated May 25, 2021 and
numbered 31491. The regulations included in the aforementioned communiqué are
summarized below.
1. Legal background
A provision for
financing expense restrictions had been added to Corporate Tax Code in 2013. In
accordance with the aforementioned regulation, in the companies whose foreign liabilities
exceed its equity; up to 10% of the interest, FX differences, commission and
similar charges over the exceeding portion shall not be considered tax-deductible
in corporate tax calculation, except for such financing expenses included in the
cost of investment. The President was also authorized to determine the rate for
financing expense restriction.
The President exercised
this authority with the President's Decree No. 3490, published in the Official
Gazette dated February 4, 2021. Through this decree, it has been regulated that
10% of the said expenses and cost elements will not be deductible in tax
calculation in periods starting from January 1st 2021.
2. Taxpayers within the scope
Financing expense restriction will be applied to
corporate taxpayers whose foreign sources (liabilities) exceed their equities.
However, since the comparison of foreign resources and equity is required in
the application of financial expense restriction, this regulation is valid for
taxpayers subject to the balance-sheet principle.
The following taxpayers will not be subject to
financial expense restrictions.
·
Pension companies operating under the Law No. 4632
·
Deposit banks, participation banks, development and
investment banks established in Turkey and operating under the Law No. 5411, as
well as Turkish branches of such organizations established abroad and financial
holding companies
·
Insurance and reinsurance companies operating under
the Law No. 5684
·
Financial leasing, factoring, financing companies and
savings financing companies operating in accordance with the contracts included
in the relevant articles of the Law No.6361
·
Institutions engaged in capital market activities
within the scope of the Law No. 6362
3. Period to which the financial expense restriction
will apply
Corporate taxpayers who are within the scope of the
expense restriction and keep their books on the basis of the balance sheet will
determine whether they will be subject to financial expense restriction by
making a comparison of equity and foreign resources (liabilities) on the basis
of the balance sheet they will prepare in accordance with the Tax Procedure Law
as of the last day of each advance taxation period.
Financial expense limitation will be taken into
account for the first time as of the first advance corporate tax period of
2021.
4. Status of financial expenses regarding borrowings
made before January 1, 2013
The provision of the Corporate Tax Law regarding the
financial expense restriction has entered into force as of January 1, 2013. Accordingly,
the expense and cost elements accrued as of January 1, 2021 in terms of nature
and amount over the liabilities obtained before January 1, 2013 will be subject
to expense restrictions.
5. Expense and cost elements related to foreign
resources covered by the expense restriction
Expense and cost elements added to the cost of the
investment are out of the scope of the expense restriction. The financial
expense and costs which were mandatorily or voluntarily included in the cost of
the investment in accordance with Tax Procedural Law communiques shall not be
subject to financial expense restrictions.
For an expense or cost item to be subject to
expense-restriction, it should arise due to use of liabilities and depending on
using period of the liabilities. Guarantee letter commissions, printing and
similar expenses for issue of securities which do not arise due to obtaining
any foreign resource (liability) shall not be subject to restriction.
Similarly, discounts applied due to early payment shall not be subject to
financial expense restriction, as such amounts result in decrease in financial
expenses.
In case of on-credit purchase of goods or services,
any FX expenses that arise due to valuation of the balances in foreign
currencies in payable accounts in accordance with provisions of Tax Procedural
Law shall be subject to financial expense restrictions.
Stamp taxes arising on loan agreements, as well as bank
and insurance transaction tax arising over payment remittance fees shall not be
subject to financial expense restriction. On the other hand, bank and insurance
transaction tax arising over the interests of loans shall be subject to financial expense restrictions.
In case loans obtained from banks are transferred to
other group entities, the financial expense restriction shall be applicable for
the entity that took over and used the loan.
6. Financial expense restriction in advance taxation
periods
As the financing expense restriction became effective starting
from January 1, 2021, the rules will be applicable in first advance corporate
tax period for the year 2021 for the taxpayers using calendar year as the
accounting period. For companies subject to special accounting period,
financial expense restrictions shall apply in the first advance tax period of
the special accounting period starting in 2021.
Corporate taxpayers who use a special accounting
period and keep their books on the basis of balance sheet will not be subject
to financial expense restrictions during the special accounting periods that
start in 2020 and end in 2021. The aforementioned taxpayers will start to apply
financial expense restrictions in the special accounting periods that will
start in 2021 and end in 2022, provided that conditions are met.
7. Case in which financing income arise in addition to
financing expenses
Taxpayers, who have obtained financing income as well
as financing expenses, are not able to net off their income and expenses by
comparing them in the application of expense restriction, and only the total of
financing expenses should be subject to expense restriction. Even if it is
within the same period, it is not possible to net off FX losses and gains arising
from different sources.
8. Status of financing expenses considered as
non-tax-deductible expenses due to thin capital, disguised profit distribution
through transfer pricing and expense restrictions in passenger cars
The financing expenses such as interest and FX losses
that had already been considered as non deductible expense in calculation of
corporate tax base due to thin capital, disguised profit distribution through
transfer pricing or expense restrictions in passenger cars shall not be
considered in the calculation of the amount subject to financial expense
restriction.
Kind regards,